Duty of Care: Financial

Loss
Dr Kate Harrington
k.g.a.harrington@exeter.ac.uk
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Duty of Care: Specific Areas

Omissions to Act

Public Bodies and the HRA 1998

Psychiatric Harm

Economic Loss
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Types of damage
Personal injury:
Physical damage
Psychiatric Damage

Property Damage

Economic Loss:
Consequential economic loss
Pure economic loss
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Pure Economic Loss: Overview
Economic Loss general overview
Historical background
Defective products/buildings not actionable in tort
Will drafting cases
Negligent misstatement exception 'Hedley Byrne
Principle'
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Pure Economic Loss v. Psychiatric Damage
Floodgate concerns

Cases similar to those with secondary victims
Damages often caused indirectly
Relationship between the claimant and defendant often
remote
Number of potential parties is sometimes large
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McLoughlin v Jones [2002] QB 1312
Alleged: Mr McLoughlin
threatened & beat up tenants.
Sentenced to 4 years
imprisonment.
Suffered psychiatric injury &
financial loss.
Served 15 weeks of this sentence
eventually set aside by the CoA
and at a retrial he was acquitted
of robbery & found not guilty of
assault.
2 allegation of professional
negligence against his former
solicitors (Grovers)
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Hale LJ in McLoughlin v Jones [2002]
The law has traditionally regarded both with some scepticism. It has
restricted the scope of any duty to avoid causing purely economic loss:
this is obviously right. The object of a great deal of economic activity is
succeeded while others fail. Much economic loss is intentionally, let
alone negligently, caused. Only, therefore, where unlawful means are
used or the defendant has assumed some responsibility towards another
to avoid such loss should there be liability. The consideration in relation
to psychiatric injury are rather different: hardly anyone sets out to
cause such injury to competitors or anyone else. The laws scepticism
has rather to do with the infinite scope of adverse psychiatric reactions
and other difficulties identified by Lord Steyn in the Frost case.
Nature of damage
Not to undermine contract law
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Categories of Economic Loss

1) Consequential
economic loss

2) Pure economic
loss

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Categories of Economic Loss
1) Consequential economic loss
- can be traced to damage to property or personal
injury;
- duty of care has not been limited;
- is consequent upon damage the consequential
economic loss occurs as a consequence of damage to
property or person.

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Categories of Economic Loss
2) Pure economic loss
- is purely financial does not result from damage to the claimants property or
injury to the claimants person, e.g.
- loss of future profits
- acquiring a product that turns out to be defective
- duty of care has been limited but there are exceptions
- Whereas there is generally no duty of care to avoid harming others through
careless actions, there has been a development in the area of causing harm
through careless statements, such as financial advice.
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Spartan Steel & Alloy v Martin & Co
(contractors) [1973] QB 27
SS&A: Stainless steel factory
in Birmingham.
Electricity from power station
via direct cable.
M&Co negligently damaged
cable.
No Electricity for 15hrs.
What could be claimed?


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Spartan Steel & Alloy v Martin & Co
(contractors) [1973] QB 27
3 types of damage:
Damage to the melt that was in the furnace at the time of the
power cut (Property damage)
- recoverable
Loss of profit that would have been made on the sale of that
melt (Consequential economic loss)
- recoverable
Loss of profit on 4 further melts which would have been
processed during the 14.5 hours the factory was closed due to the
power cut (Pure economic loss)
- non-recoverable (Davies LJ dissenting)
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Spartan Steel & Alloy v Martin & Co
(contractors) [1973] QB 27

Whenever the courts draw a line to mark out the
bounds of duty, they do it as a matter of policy so as to
limit the responsibility of the defendant.

Lord Denning
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Spartan Steel & Alloy v Martin & Co
Policy Considerations
[The cutting of the supply of electricity] is a hazard which we
all run And when it does happen, it affects a multitude of
persons by putting them to inconvenience, and sometimes
to economic loss. The supply is usually restored in a few hours,
so the economic loss is not very large. Such a hazard is
regarded by most people as a thing they must put up with
without seeking compensation from anyone. They do not try to
find out whether it was anyones fault. They just put up with it.
They try to make up the economic loss by doing more work
next day [installing a stand-by system, or taking out an
insurance policy]. This is a healthy attitude which the law
should encourage.
Lord Denning
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Spartan Steel & Alloy v Martin & Co
Policy Considerations
[I]n such a hazard as this, the risk of economic loss
should be suffered by the whole community who
suffer the losses - usually many but comparatively
small losses - rather than on the one pair of
shoulders, that is, on the contractor on whom the
total of them, all added together, might be very
heavy

Lord Denning
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Historic Development
Rise of extended duty of care:
Hedley Byrne v Heller & Partners [1964] AC 465
negligent statements (discussed later)

Anns v Merton BC [1977] 2 All ER 492 no longer
good law

J unior Books v Veitchi Co Ltd. [1983] 1 AC 520
not overruled, but very unlikely to be followed
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Today
rules stayed with the distinction
Muirhead v Industrial Tank
Specialists [1986] QB 507
1. loss of the lobsters in the tank
2. loss of profit of the lobsters
that had died
3. expenditure incurred trying to
fix the pumps
4. cost of the pumps
5. profit he would have made if
the pumps had been working
properly
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Muirhead v Industrial Tank Specialists
[1986] QB 507
Held:
1. loss of the lobsters in the tank (property damage)
2. loss of profit for the lobsters that had died
(consequential loss)
3. expenditure incurred trying to fix the pumps (pure
economic loss)
4. cost of the pumps (pure economic loss)
5. profit he would have made if the pumps had been
working properly (pure economic loss)
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Muirhead v Industrial Tank
Specialists [1986] QB 507
Important point: although the pumps had
caused damage to other property (i.e. they
had killed the lobsters) they were not
themselves 'damaged' in the tort lawyers
sense of the word. They were defective.

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Defective loss -
not generally recoverable
D&F Estates Ltd. V Church Commissioners [1989] AC
177 (defective plasterwork)
-Tort should not undermine contract;
-Complex structure theory which proposed that there
may be liability if one part of the building, e.g. a boiler
caused damage to the rest of the building;
-Defect in the product could not cause further direct
harm

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Complex Structure Theory
in complex structures or complex chattels one part
of a structure or chattel might, when it caused damage
to another part of the same structure or chattel, be
regarded in the law of tort as having caused damage
to other property for the purpose of the application of
Donoghue v. Stevenson principles. I expressed no opinion
as to the validity of this theory, but put it forward for
consideration as a possible ground on which the facts
considered in Anns (...) might be distinguishable from the
facts which had to be considered in D. & F. Estates itself. I
shall call this for convenience the complex structure
theory
Lord Bridge in Murphy v Brentwood DC
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Complex Structure Theory
The reality is that the structural elements in any building form a
single indivisible unit of which the different parts are essentially
interdependent. To the extent that there is any defect in one part of
the structure it must to a greater or lesser degree necessarily affect
all other parts of the structure. Therefore any defect in the
structure is a defect in the quality of the whole and it is quite
artificial, in order to impose a legal liability which the law would not
otherwise impose, to treat a defect in an integral structure, so far as it
weakens the structure, as a dangerous defect liable to cause
damage to other property
Lord Bridge in Murphy v Brentwood DC
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Murphy v Brentwood DC
[1991] 1 AC 398 HL
Cost of remedying a defect is pure economic loss (Murphy
overruled Anns v Merton)
However, apparent defects exceptions:
a) an action may be recovered for injury caused by an apparent
defect where it is unreasonable to expect the claimant to
repair the defect or vacate the building
b) where the defect is a potential source of liability for
neighbouring land owners
They also rejected the 'complex structure theory'
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Robinson v P.E. J ones (Contractors) Ltd
[2011] EWCA Civ 9
Agreement with contractor to build house Sept 2004
found flue runs not constructed in accordance with good
building practice/Building Regulations.
Out of time to claim in contract but claim in tort possible
based on date of discovery of defect under s. 14A of
Limitation Act 1980
Burnton LJ: builder/vendor of a building did not by reason
of contract to construct building assume any liability in the
tort of negligence in relation to defects in the building
giving rise to purely economic loss.
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Robinson v P.E. J ones
(Contractors) Ltd [2011] EWCA Civ
9
The decision of the
House of Lords in
Anns v Merton (),
like its earlier
decision in Junior
Books Ltd v Veitchi
Co Ltd (), must
now be regarded as
aberrant, indeed as
heretical.
Burnton LJ
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There must be a proprietary interest in order to
recover damages for damaged property
Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd
[1986] AC 1 (time-charterers)
Leigh & Sullivan v Aliakmon Shipping Co [1986] AC 785
(steel coils)
"[T]here is a long line of authority for a principle of law that, in
order to enable a person to claim in negligence for loss
caused to him by reason of loss of or damage to property,
he must have had either the legal ownership of or a
possessory title to the property concerned at the time
when the loss or damage occurred, and it is not enough for
him to have only had contractual rights in relation to such
property which have been adversely affected by the loss of
or damage to it. Lord Brandon, 809
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The importance of policy
Conarken Group Ltd v
Network Rail Infrastructure
Ltd [2011] 2 CLC 1
Network Rail (C) suffered
loss when employees of
Conarken (D), 2 transport
companies negligently
damaged railway
infrastructure.
D admitted liability, but
disputed amounts payable to
train operating companies
(3
rd
parties)
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Jackson LJ in Conarken Group Ltd v
Network Rail Infrastructure Ltd [2011]
four principlesdiscerned from the authorities:
1.Economic Loss which flows directly & foreseeably from
physical damage to property may be recoverable.
2.Loss of income following damage to revenue generating
property
3.Loss of future business as a result of damage to
propertylies on the fringe of recoverability
4.In choosing the appropriate measure of damagesthe court
seeks to arrive at an assessment which is fair and
reasonable (145)
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Jackson LJ in Conarken Group Ltd v
Network Rail Infrastructure Ltd [2011]
Judges and jurists recognise the impossibility of
formulating any single set of rules defining the extent to
which loss and damage caused by torts should be
recoverable. Thus, they sometimes invoke common
sense or policy or the consideration of what is fair and
reasonable as explaining the restrictions upon recovery
imposed in an individual caseit seems to me that the
occasional appeals by judges or scholars to common
sense or policy or what is fair and reasonable underline
that no single set of rules is comprehensive or can be
inflexibly applied (146)
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Will Drafting Cases
Ross v Caunters [1980] Ch 297

Megarry VC: DoC also owed to beneficiaries, as
sufficient relationship of neighbourhood or
proximity existed between parties


White v J ones [1995] 2AC 207

3:2 for daughters (policy decision?)



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Pure Economic Loss: Overview
Economic loss: consequential v pure (Spartan Steel)
Historical background: (Anns Junior Books
Muirhead)
Defective products/buildings: (Murphy)
Will drafting cases

Negligent misstatement exception 'Hedley Byrne
Principle'
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Economic Loss by
Negligent Misstatement
Principle of assumption
of responsibility

Hedley Byrne v Heller &
Partners [1964] AC 465

Disclaimer in the contract

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Hedley Byrne v Heller & Partners [1964]
AC 465
To impose a duty of care there must be:
1) the existence of a special relationship between the
claimant and the defendant involving
2) an assumption of responsibility on behalf of the
defendant and...
3) reasonable
4) reliance upon the statement by the claimant.
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Hedley Byrne v Heller & Partners [1964]
AC 465

'It is plain that the party seeking information or
advice was trusting the other to exercise such a
degree of care as the circumstances required,
when it was reasonable for him to do that, and
where the other gave the information or advice
when he knew or ought to have known that the
inquirer was relying upon him.'
Lord Reid
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Special relationship and assumption of
responsibility
Extension of Hedley Byrne:
Social context
Employment references
Provision of services & overlap with contractual relationship
Assumption of responsibility where D expressly denies responsibility
Limitations of 'assumption of responsibility
Case where there is no assumption of responsibility
Exclusion Clauses
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Social Context

Chaudhry v
Prabhakar
[1989] 1 WLR 29
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Employment references
Spring v Guardian Assurance PLC [1995] 2 AC
296
reference supplied by Guardian to Scottish
Amicable
Cf Kapfunde v Abbey National PLC [1999] ICR
1
Doctor not liable in negligence to job applicant
for medical report.
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Provision of services and overlap with
contractual relationship
Henderson v Meritt Syndicates Ltd [1995] 2
AC 145
Lord Goff found: once the assumption of
responsibility had been found, it was no longer
necessary to consider whether it was fair, just
and reasonable to impose a duty of care.
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Where the defendant
expressly denies responsibility
Smith v Eric Bush
[1990] 1 AC 831

Private citizen =
policy decision?

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Limitations of
'assumption of responsibility'
Caparo v Dickman [1990] 2 AC 605
1. harm must be reasonably
foreseeable as a result of the
defendant's conduct
2. the parties must be in a relationship
of proximity
3. it must be fair, just and reasonable
to impose liability
Moore Stephens v Stone & Rolls Ltd
[2009] 1 AC 1391 (firm in liquidation -
confirmed Caparo)
HL (3:2)

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Caparo v Dickman [1990] 2 AC 605
A distinction between situations like Smith v Eric Bush and
Hedley Byrne compared with Caparo.
In the former cases:
'the defendant giving advice or information was
fully aware of the nature of the transaction which the
plaintiff had in contemplation, knew that the advice or
information would be communicated to him directly or
indirectly and knew that it was very likely that the
plaintiff would rely upon the advice or information in
deciding whether or not to engage in the transaction in
contemplation. Lord Bridge
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No assumption of responsibility
Customs and Excise
Commissioners v
Barclays Bank [2006]
UKHL 28
Discussion of 3 tests
for DofC in economic
loss: assumption of
responsibility; Caparo;
incremental.
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Exclusion Clauses
McCullagh v Lane Fox
& Partners Ltd [1996] 1
EGLR 35
Hobhouse LJ: In my
judgment, the disclaimer
puts the present case on
all fours with the actual
decision in Hedley Byrne
as explained earlier."

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Summary
1. The purpose for which the statement was made
2. The purpose for which the statement was communicated
3. The relationship between advisor, advisee & any relevant
TP
4. The size of class to which the C belongs
5. The state of knowledge of the adviser
6. Reliance on the advice
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Further Reading
Barker, Kit, Economic Loss and the Duty of Care: A Study in the
Exercise of Legal Justification Rickett, Charles, (ed), Justifying
Private Law Remedies (Hart, Oxford 2008) 173
Barker, Kit, Relational Economic Loss The Search for Rational
Limits in Degeling, Simone, Edelman, James, and Goudkamp,
James, (eds), Torts in Commercial Law (Thomson Reuters, 2011)
163
Stapleton, Jane, Duty of Care and Economic Loss: A Wider Agenda
(1991) 107 Law Quarterly Review 249
Witting, Christian, Distinguishing between property damage and pure
economic loss: a personality thesis (2001) 21 Legal Studies 481
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